Practical Investment Management 2 nd Edition by Robert

Practical Investment Management 2 nd Edition by Robert A. Strong University of Maine Power. Point Presentation by Yee-Tien Fu National Cheng-Chi University Taipei, Taiwan © 2001 South-Western College Publishing

CHAPTER ONE THE CONCEPT OF INVESTING

Outline u Investing Defined u Investment Alternatives Assets u Security Groupings Three Reasons for Investing Income u Securities Appreciation Excitement The Academic Study of Investments Theoretical Research Empirical Research Professors vs. Practitioners 3

Investing Defined ? To consume, to save, or to invest a dollar that is earned ? ? ? Both saving and investing amount to consumption shifting through time. However, investing is risky, saving is not. 4

Investment Alternatives Assets financial assets e. g. bond, stock real assets e. g. land Assets are things that people own. Financial assets have a corresponding liability, while real assets do not. 5

Investment Alternatives A security is a legal document that shows an ownership interest. Securities are historically associated with financial assets, but are also applicable to real assets. Securitization is the process of converting an asset or collection of assets into a more marketable form. 6

Investment Alternatives There are three broad categories of securities. Securities Equity Securities e. g. common stock Fixed Income Securities e. g. bonds, preferred stock Derivative Assets e. g. futures, options 7

Three Reasons for Investing Why invest ? ? ? People invest to … supplement their income earn capital gains Appreciation is an increase in the value of an investment. experience the excitement of the investment process 8

The Academic Study of Investments Theoretical research builds mathematical models and proposes pricing relationships rather than studying actual market data. E. g. arbitrage relationships, impact of stock splits and cash dividends on investors Theoretical models are tested by conducting empirical research. 9

The Academic Study of Investments Empirical research uses actual market data rather than mathematical models. An anomaly is an observed result that defies explanation within the known theoretical framework. 10

The Academic Study of Investments vs. Professors Practitioners The investment community can learn much from both rigorous academic research and from the life experiences of people on the front lines of the marketplace. 11

Review u Investing Defined u Investment Alternatives Assets u Security Groupings Three Reasons for Investing Income u Securities Appreciation Excitement The Academic Study of Investments Theoretical Research Empirical Research Professors vs. Practitioners 12